China pilot free trade zone opens in reform push

September 30, 2013

BEIJING - Operations formally kicked off Sunday at a new free trade zone in Shanghai that China's government has billed as a major step for financial reforms and economic experimentation, but significant changes look to be years away.

State media reported that a first batch of 25 Chinese and foreign companies were granted licenses to register in the zone.

Eleven financial institutions, including Citibank and Singapore's DBS, were also cleared to operate in the zone.

Article Photos

AP?PHOTOShanghai Municipality Communist Party Secretary Han Zheng, left, inaugurates the Shanghai Free Trade Zone during a ceremony in Pudong district, Shanghai Sunday. China’s first pilot free trade zone started operating in Shanghai on Sunday, billed as a test bed for the country’s drive to deepen economic reform and providing a testing ground for free capital account convertibility of its currency.

The China (Shanghai) Pilot Free Trade Zone is a nearly 29-square-kilometer (11-square-mile) district that covers four existing special trade zones in Pudong district, including one at the airport.

China's State Council formally announced rules for the new free trade zone on Friday. They outline goals to upgrade financial services, promote trade and improve governance as well as measures to encourage foreign investment in 18 sectors in the country's tightly regulated service industry.

There are also plans to experiment with the convertibility of China's tightly controlled currency, the yuan, on the capital account and let market forces rather than regulators set interest rates.

The zone is expected to serve as a laboratory for such financial experiments before they are rolled out elsewhere in China. No timeline was given for any changes, but rules in the zone will be introduced over a three-year period, according to the announcement.

At a ceremony marking its opening, Commerce Minister Gao Hucheng said the government hoped the zone would act as "an experimental field to conduct economic reform" and promote economic development nationwide.

The Shanghai zone has been touted as the most important attempt at economic reform since the establishment of the country's first special economic zone in 1980 in Shenzhen, next door to Hong Kong.

That zone allowed in foreign investment aimed at harnessing cheap labor to build a manufacturing industry that became a driving force in helping China eventually become the world's second-biggest economy.

The government has pledged to open up 18 service industry sectors to foreign investment, including shipping, law and engineering. Foreign-owned performing arts agencies and medical institutions will be allowed.

The sale of video game consoles, which is banned in China, will also be allowed, pending approval from authorities of individual games and systems.

Another initiative will permit foreigners to set up joint venture talent management agencies with local partners.

The rules say the opening-up measures will be applicable to companies that are registered in the zone.

Foreign companies will also be allowed to provide some Internet services, though the official Xinhua News Agency reported before the launch that Internet restrictions would not be lifted, following a report by a Hong Kong newspaper that banned websites such as Facebook would be unblocked inside the zone.

Dai Haibo, deputy secretary general of Shanghai's government and vice-director of the zone's management committee, said it would take three years to determine whether the zone's rules and system were effective.

After three years, the country will build on the experience gleaned from the Shanghai free trade zone and there may be further reform goals, he told a news conference following the official opening ceremony.

Wei Yao, a China economist at Societe Generale, said in a research note that setting up the zone in Shanghai, a city of "great strategic importance," was a clear sign that policymakers wanted to push for fast economic liberalization.

"The framework that is shaping up looks rather promising, although details of most measures are to be put in place over the course of six months to a year," she wrote. "Like all previous economic experiments, this project is going to be a work in progress, subject to constant refinement."